Piotrosky F-Score is a number between 0 and 9 which is used for assessing the strength of a company’s financial health through Fundamental Analysis. Most of the value investors are using this Piotrosky F-Score to find the best value stocks.
This (Piotrosky) system is invented by Joseph D. Piotroski, who is an American professor of accounting at Stanford University’s Graduate School of Business and a Senior Fellow at the Asian Bureau of Finance and Economic Research.
Piotrosky F-9 method of stock screening is based on 9 parameters. The score gives 1 point for every parameter met. Stocks with Scores of 8-9 are considered to be fundamentally good companies. Those notching up 0-2 are considered as weak (in terms of financials).
The Piotrosky score is broken down in to the following categories.
1) Net income: [Total income (for the year) – Total expenses (for the year)].
The net income measures the profit/loss made during the current year.
If the Net income is positive, 1 point is Scored else Zero.
2) Operating cash flow: It measures, if the company is able to make efficient cash flow.
If the Operating cash flow is positive , 1 point is scored else Zero.
3) If the Operating cash flow > net income, 1 point is added else Zero.
4) Return On Assets: – Net income/ Total Assets.
It measures, how the management is utilizing its total assets to make profits.
If the ROA for the current year > the previous year, 1 point is added else Zero.
5) Leverage or Gearing : Long term debt /Total Assets.
It measures how much of Assets are financed by the Debt.
If the Leverage in current year is < previous year, 1 point is added else Zero.
6) Current ratio:- Current assets /current Liabilities.
It measures the company’s ability to pay back it’s short-term Liabilities with it’s short-term assets.
If the Current ratio in current year is lesser than the previous year,1 point is added else Zero.
7) Outstanding shares:- It measures, If a company is able to grow it’s business with out diluting it’s equities.
If the outstanding shares remained same or came down due to buy back,1 point is added else Zero (it has gone up due to fresh issues).
8) Gross margin: Gross profit /Sales. – It measures the percentage of Total sales that the company retains after incurring direct costs.
If the Gross margin in the current year is higher than previous year, 1 point is added else Zero.
9) Asset turnover ratio:– Total sales /Total Assets.
It measures how efficiently the management uses it’s assets.
If the Asset turnover in the current year is > the previous year, 1 point is added else Zero.
There are Piotroski-Scanners to get the list of stocks with different Scores.